Prize Lecture: Abhijit Banerjee, Prize in Economic Sciences 2019 | Summary and Q&A

Summary

Abhijit Banerjee, one of the 2019 Nobel Prize winners in Economic Sciences, discusses the role of field experiments (also known as randomized control trials or RCTs) in economics. He argues that RCTs have changed the practice of economics by challenging traditional assumptions and methodologies. Banerjee presents three common criticisms of RCTs and provides evidence to counter each criticism. He highlights the importance of studying small interventions and their cumulative impact, as well as the significance of understanding the psychological effects of poverty on productivity. Ultimately, he suggests that RCTs can help build a more nuanced and theory-driven understanding of economic behavior.

Questions & Answers

Q: What are RCTs and how have they changed economics?

RCTs, or randomized control trials, are experimental studies that compare the effects of interventions through random assignment of treatment and control groups. Banerjee argues that RCTs have changed economics in two ways: first, by changing the practice of economics and how questions are answered, and second, by changing the questions economists ask and the way they think about potential answers. RCTs have introduced a more empirical and specific approach to studying economic phenomena.

Q: What is the difference between the traditional economic approach and the RCT approach?

The traditional economic approach starts with a hypothesis or model of human behavior and uses data to make inferences about that behavior. In contrast, RCTs start with an idea or intervention and test it in different contexts to see if the observed outcomes support a generalizable truth. The traditional approach often relies on assumptions about rational behavior, while RCTs allow for more flexibility and the discovery of new insights that may challenge these assumptions.

Q: What example does Banerjee provide to illustrate the difference between the two approaches?

Banerjee discusses a study on the spread of information through social networks. Economic theory suggests that central individuals in a network would be most effective in spreading a message, but field experiments found that gossips, who were not central in the network, were three times as effective. This insight, not accounted for in economic theory, underscores the value of RCTs in discovering unexpected dynamics in economic behavior.

Q: What does Banerjee argue about the effect of giving money to the poor?

Banerjee challenges the belief that giving money to the poor will make them lazy. He cites RCTs conducted in India and Bangladesh, which found that giving cash transfers or assets to the poor did not make them lazier. In fact, the studies show that these interventions often led to higher incomes and increased productivity among the recipients. This challenges the conventional economic assumption that wealth leads to laziness.

Q: How does Banerjee address the criticism that RCTs focus on small interventions?

Banerjee argues that RCTs are not limited to small interventions and can provide insights into larger economic questions. He discusses the study on a poverty trap, where RCTs were used to investigate whether individuals remain in poverty because they lack opportunities. The findings showed that providing assets and support to the poorest individuals resulted in long-term income growth and reduced poverty, challenging the notion that people stay poor due to personal shortcomings. This demonstrates that RCTs can address significant economic issues.

Q: How does Banerjee counter the belief that RCTs are piecemeal and cannot form a comprehensive theory?

Banerjee suggests that RCTs actually contribute to building a theory by allowing economists to test specific hypotheses and piece them together over time. He gives an example of studying the psychological effects of poverty on productivity. By conducting multiple RCTs and examining various aspects of the intervention, researchers were able to understand the relationship between poverty, psychology, and productivity. RCTs provide a way to build theories incrementally and uncover nuances in economic behavior.

Q: What does Banerjee conclude about the significance of RCTs in economics?

Banerjee expresses gratitude to all the researchers who have contributed to the field of RCTs and emphasizes the transformative impact RCTs have had on development economics. He suggests that RCTs not only challenge traditional economic assumptions but also open up new avenues of inquiry and understanding. RCTs have the potential to provide more nuanced theories and better inform policy interventions in the fight against poverty.

Takeaways

Banerjee's lecture highlights the transformative power of field experiments in economics. RCTs have challenged traditional assumptions and methods, allowing researchers to study small interventions and uncover their cumulative effects. RCTs have also contributed to a deeper understanding of the psychological factors influencing economic behavior. By conducting multiple experiments and piecing together the findings, RCTs can help build more comprehensive theories. Overall, RCTs offer a promising approach for addressing global poverty and improving the practice of economics.